JP Morgan Chase 2014 Annual Report Download - page 129

JPMorgan Chase & Co./2014 Annual Report 127
As previously noted, the Firm uses collateral agreements to
mitigate counterparty credit risk. The percentage of the
Firm’s derivatives transactions subject to collateral
agreements – excluding foreign exchange spot trades, which
are not typically covered by collateral agreements due to
their short maturity – was 88% as of December 31, 2014,
largely unchanged compared with 86% as of December 31,
2013.
Credit derivatives
The Firm uses credit derivatives for two primary purposes:
first, in its capacity as a market-maker; and second, as an
end-user, to manage the Firm’s own credit risk associated
with various exposures. For a detailed description of credit
derivatives, see Credit derivatives in Note 6.
Credit portfolio management activities
Included in the Firm’s end-user activities are credit
derivatives used to mitigate the credit risk associated with
traditional lending activities (loans and unfunded
commitments) and derivatives counterparty exposure in the
Firm’s wholesale businesses (collectively, “credit portfolio
management” activities). Information on credit portfolio
management activities is provided in the table below. For
further information on derivatives used in credit portfolio
management activities, see Credit derivatives in Note 6.
The Firm also uses credit derivatives as an end-user to
manage other exposures, including credit risk arising from
certain securities held in the Firm’s market-making
businesses. These credit derivatives are not included in
credit portfolio management activities; for further
information on these credit derivatives as well as credit
derivatives used in the Firm’s capacity as a market maker in
credit derivatives, see Credit derivatives in Note 6.
Credit derivatives used in credit portfolio management
activities
Notional amount of
protection
purchased and sold (a)
December 31, (in millions) 2014 2013
Credit derivatives used to manage:
Loans and lending-related commitments $ 2,047 $ 2,764
Derivative receivables 24,656 25,328
Total net protection purchased 26,703 28,092
Total net protection sold —96
Credit portfolio management derivatives
notional, net $ 26,703 $ 27,996
(a) Amounts are presented net, considering the Firm’s net protection
purchased or sold with respect to each underlying reference entity or index.
The credit derivatives used in credit portfolio management
activities do not qualify for hedge accounting under U.S.
GAAP; these derivatives are reported at fair value, with
gains and losses recognized in principal transactions
revenue. In contrast, the loans and lending-related
commitments being risk-managed are accounted for on an
accrual basis. This asymmetry in accounting treatment,
between loans and lending-related commitments and the
credit derivatives used in credit portfolio management
activities, causes earnings volatility that is not
representative, in the Firm’s view, of the true changes in
value of the Firm’s overall credit exposure.
The effectiveness of the Firm’s credit default swap (“CDS”)
protection as a hedge of the Firm’s exposures may vary
depending on a number of factors, including the named
reference entity (i.e., the Firm may experience losses on
specific exposures that are different than the named
reference entities in the purchased CDS); the contractual
terms of the CDS (which may have a defined credit event
that does not align with an actual loss realized by the Firm);
and the maturity of the Firm’s CDS protection (which in
some cases may be shorter than the Firm’s exposures).
However, the Firm generally seeks to purchase credit
protection with a maturity date that is the same or similar
to the maturity date of the exposure for which the
protection was purchased, and remaining differences in
maturity are actively monitored and managed by the Firm.